Global Economics

Iceland Faces Uphill Battle to Join EU

European leaders agreed to start accession talks with Iceland, but the negotiations may stall if the debt-ridden country doesn't repay losses from its local banks

European leaders have finally given the green light for Iceland to begin EU accession negotiations, but the Dutch Prime Minister has indicated it will be hard for the country to join if it does not pay for losses incurred in the Icelandic banking collapse.

Mid-afternoon on Thursday (17 June), the summer European Council in Brussels signed off on language approving the start of official talks. The British and the Dutch insisted however on wording that made implicit mention of the ongoing banking dispute.

The European Council "notes that Iceland meets the political criteria set by the Copenhagen European Council in 1993 and decides that accession negotiations should be opened," says the text.

"It recalls that negotiations will be aimed at Iceland…addressing existing obligations such as those identified by the EFTA Surveillance Authority under the EEA Agreement, and other areas of weakness," the communique, which, sources say was to a large extent drafted by the Netherlands, continues "including in the area of financial services."

The European Free Trade Association Surveillance authority essentially performs the same executive role as the European Commission, but for the countries of the European Free Trade Association, the free trade body linking Iceland, Norway, Lichtenstein and Switzerland to the EU.

The Surveillance Authority on 26 May sent a letter warning that Reykjavik was in breach of European directives in treating Dutch and British depositors differently from their domestic counterparts.

"Iceland…[is] under obligation to provide the minimum compensation," the letter read.

A UK diplomat told EUobserver: "This is a not-so-coded reference to the billions Iceland owes the UK."

After the Icelandic Icesave internet bank collapsed in 2008, depositers in the UK and the Netherlands were compensated by their governments to the tune of €3.8 billion. The Hague and London now are demanding Reykjavik pay them back.

The government has agreed to do so, but the terms are considered onerous by a majority of the population. Under the agreement the loan will be paid back over 15 years with interest, with estimates suggesting every Icelandic household will have to contribute around €45,000.

According to an EU diplomat, Prime Minister Jan-Peter Balkanende told his fellow leaders: "We won't block negotiations, but there are hard demands Iceland has to meet."

The Dutch are pleased that they have "managed to convince the other member states that this is not a bilateral issue. It's turned into a whole-of-EU issue - that's very important."

"It is essential to underline that in the course of negotiations the extent to which Iceland sticks to its international obligations will determine the momentum of the talks," the EU diplomat added.

"They have to solve this before accession."

The British take a somewhat softer line. "We are happy with the opening of negotiations. It doesn't explicitly mean they have to pay up before they join, but realistically it will be very difficult for them to join if they don't pay," a UK diplomat told this website.

Iceland's ambassador to the EU, Stefan Johannesson, said: "It is self-evident that Iceland will live up to its obligations. There is no question. We are fully committed to the ongoing negotiations and see the issue being resolved with the UK and the Netherlands."

Separately, an Icelandic diplomat argued that the issue remains a dispute distinct from its EU application. "Look, [Dutch foreign minister] Verghagen, [ex-UK foreign secretary] Miliband, [EU enlargement commissioner] Fuele, they've all said at different times that this is a bilateral issue."

Ireland, a self-described "very enthusiastic supporter of Iceland's accession," tells a different story, and is much more sanguine about the dispute.

"This is important as it allows the next step. Any bilateral issues, or issues in general, I'm sure will be dealt with in the process of negotiations. [The UK and the Netherlands] have important issues, but from our point of view, we very much want to start negotiations. These issues can be dealt with," an Irish contact said.

Ireland sees in Iceland a minor but strongly like-minded ally on many issues upon its joining the Council. The two countries have similar political outlooks, coming from their position as islands with smaller but open economies. They also share what might be called a "common geographic perspective."

"Things look a little different coming from the western outer fringes of Europe," one Irish diplomat joked.

Thursday's summit development may in the end be moot, as the popular mood in Iceland has swung sharply from support for joining the EU in the immediate aftermath of the economic crisis to a growing scepticism.

The latest internet opinion poll indicates that some 58 percent of the Icelandic population are in favour of withdrawing the application for EU membership.

Angela Filota, the European Commission's enlargement spokeswoman told this website: "This is an issue of concern."

European Commission President Jose Manuel Barroso implicitly conceded the problem in his words to reporters after the summit: "We are ready to begin negotiations with Iceland provided that Iceland wants to join the community."

An Icelandic diplomat lamented: "This is entirely down to Icesave."

Following the decision, the commission will expand the EU's one-man delegation to the island to a team of 12. They hope to have the office up and running by September.

The commission must now develop a negotiating framework, which due to the largely positive accession assessment of Iceland's prospects made by the EU executive in February, should only take a few months, according to Ms Filota. The negotiating framework must then be adopted by the Council of Ministers, representing the member states.

After this step, a first intergovernmental conference between Iceland and the member states takes place. The next stage of the accession negotiation process should occur before the end of the year, according to the commission.